WOTR: Big water projects should make Westerners queasy

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Across maps of the arid West, expensive water pipelines are being plotted to meet the region's profound need for water. Among those under serious consideration are a 263-mile pipeline to bring eastern Nevada water to Las Vegas, southwestern Utah's 139-mile Lake Powell pipeline, and the 500-mile Flaming Gorge pipeline from Wyoming to Colorado. Each would cost billions of dollars.

But what if there's not enough demand for water to pay for these projects?

This might seem like an implausible question in a region defined by growth and expansion for over a century. But in fact, demand for water is falling in many parts of the country. Between the 1970s and the late 2000s, the amount of water used by American households fell everywhere - by tens of thousands of gallons each year in Phoenix and Seattle, to nearly 100,000 gallons a year in Las Vegas.

The trend is due to a slew of reasons, including smaller households, water-efficient indoor fixtures, conservation programs and the protracted economic slowdown that devastated housing markets, especially in the West. But even with the economic recovery and projected population growth in many Western cities, the tendency to assume that household use will stay steady is demonstrably out of line with reality.

Declining demand has surprised many water-system managers and created complex financial challenges for ensuring future water supplies. For those systems planning to finance multibillion-dollar projects, the challenges are especially daunting.

Like those in the rest of the country, Western water projects are typically financed by issuing bonds to cover a project's upfront costs. The subsequent debt and interest costs are then repaid to bondholding investors using revenues the water utilities generate by selling water. The arrangement worked well when the federal government bankrolled most projects. But those days are over: Federal funds have largely dried up.

That means water utilities must assume far larger debt obligations to finance big-ticket projects. It also means they need to sell more and more water, and at higher rates, to repay those debts.

For water-challenged cities like Las Vegas and San Antonio, which have seen the benefits of strong water conservation programs, this creates a financial catch-22. Las Vegas was an early pioneer in demand management, when, in the 1990s, it began rewarding homeowners for tearing up their lawns and replacing the grass with desert vegetation. The program was a big success, reducing water demand by 18 percent.

To help offset this evaporating demand, Las Vegas turned to connection fees paid for by new households that were added to the system. But when the housing market stalled, that lucrative revenue source plummeted. Las Vegas saw its water connection fees from new housing starts fall to $3 million in 2010, from a peak of $188 million during the housing boom.

As a result, the Southern Nevada Water Authority has recently begun allowing customers to replant the lawns they were once paid to tear up. It's a short-term revenue fix that only contributes to the region's dire water-supply shortage.

So how necessary are some of these hugely expensive proposals, especially when demand management has proven effective in reducing water-supply pressures? Moreover, if water managers push ahead in building these expensive projects, what financial risks will ratepayers and investors have to take on?

For those thinking the risk scenarios are implausible, take a look at the Las Vegas Valley Water District. Nearly $2 billion of its bond debt was downgraded in 2011, due to the double whammy of declining water sales and emergency capital expenses to finance a massive new intake pipe from water-deprived Lake Mead. Consider as well Colorado Springs, whose water system was placed on a credit watch last March in light of the slow economic recovery, rising water rates and a nearly $1.5 billion capital program to build a new pipeline, which will pump water from a tributary of the Mississippi River.

Lessons can also be learned from Australia, which responded to severe water shortages by financing a bevy of expensive new water desalination plants. Today, four of the six plants have been placed on standby due to declining water demand, triggered in large part by higher water rates necessitated by the projects' costs. The nation's first large-scale desalinization plant in Florida faces a similar problem.

Here's the bottom line: Price-sensitive demand, growing populations and climate change trends are creating unprecedented challenges to our Western water resources. How water managers solve these challenges - and pay for them - should be less about pie-in-the-sky solutions and more about old-fashioned thrift.

Sharlene Leurig is a contributor to Writers on the Range, a service of High Country News (hcn.org). She is a water-financing expert at Ceres, a national nonprofit group based in Boston that advocates for business leadership on climate change.